Diversification- not in numbers but in style!

By | August 14, 2011

Most investors hang on to only a few catchy phrases when it comes to portfolio building and growth in their investments. One such phrase is diversification. By diversification, we mean that, when an individual’s funds are invested in limited number of funds but which are aggressive in nature. Although this is the basis on which further advice is chartered out, the analysis will differ from each individual depending on their financial requirements, goals and their risk appetite.

Diversification of funds does not involve number of funds, but rather the functionality of each fund that matters the most. If you are a young individual who have just started on their career, it is obvious that you have a long way to go in this corporate world. Considering your goals that are required for wealth creation, a plan is drawn. Assuming the advantage of one of the most important factors- age, an aggressive portfolio is what is recommended. Try to have a good appetite for risk. Do not get boggled up by slight changes in the market rates in short run, since these changes are bound to be reversed in over a long term period.

The above phenomenon is best applied in situations where you look towards financing your long term requirements. Long term goals are those goals that are above 3 years. Long term goals can be like buying a house in the next 5 years without the need for a home loan or setting aside ample amount of your savings for your child’s higher education without opting for an educational loan etc.

Remember it is not prudent to poses more than 5 funds. As said earlier, it is the style of investment required and not the number of funds that your portfolio contains. What must be understood is that, possessing more number of funds reduces the rate of return which you might have otherwise gained by investing higher amounts in selective funds. Moreover it will add up to your expense due to the transaction costs that are involved, which varies from fund to fund.

Make sure to invest 60% of your funds in equities and the rest 40% in debt instruments. Public Provident Fund (PPF) is the most sought after debt instrument. Apart from the excellent post tax returns, it gives the investor an advantage of tax emption through the course of investing in it.

Having provided a structure to your portfolio and following a SIP route of investment plan, do re-evaluate your portfolio at least once in a year as this will enable you to analyze your fund’s performance. Opt out of those funds that are showing under performance even in the bullish markets. But before you sign up for any fund, make sure you read all the terms and conditions of the fund so that you are aware of the fund’s policies and are not in a position to lose any amount unnecessarily due to negligence on your behalf. Only make changes to your portfolio only if it is required and not on other investor’s statements.

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